Everyone who invests in cryptocurrencies comes across APR and APY. Without understanding what exactly they mean and how they can be used when performing various cryptocurrency transactions, it is unlikely that you will be able to make good money with crypto. So let’s find out how two key crypto metrics, APR and APY, can help in the investment process.
What are APY and APR in cryptocurrency?
The main task of APR and APY is to measure the profitability of investments in cryptocurrencies:
- APR, i.e. annual percentage return, which shows how much interest you will earn in a year if you make an investment of a certain amount. It does not take into account compound interest (i.e., interest that accumulates and also earns interest).
- APY is the annualized percentage yield. This indicator takes into account the compound interest, that is, it shows how much you will actually earn in a year if interest is accumulated and charged on the interest already received. APY gives you a more accurate idea of how much income you can earn on cryptocurrencies.
| APR | APY | |
| Identification | Annual interest rate excluding compound interest | Annualized interest yield including compound interest |
| Compound interest | Don’t get involved | It takes into account |
| Frequency of accrual | Every year | Daily |
| Profitability | Usually higher | Usually lower |
To make things even clearer, let’s take a look at how the indicators work in the real world. Let’s say you invest 1000 USDT with an APR of 10% and an APY of 10.47%.
- APR. You will receive 100 USDT as a percentage for the year.
- APY. Thanks to compound interest, you will receive 104.7 USDT.
Here’s another example, this time with another popular cryptocurrency, Ethereum:
- APR. You invest 1 ETH in a deposit with an APR of 5%. In a year, you will receive 0.05 ETH, or 5% of your initial deposit.
- APY. You invest 1 ETH in a deposit with an APY of 5%, which is compounded monthly. After a year, you will receive 0.0512 ETH, or 5.12% of your initial deposit.
APY and APR: a video on the use of indicators on cryptocurrency exchanges
You will be able to understand the similarities and differences between APY and APR, as well as learn how these key indicators are used in work on Stellar and Binance, in the attached video. Watch the expert material and you will be able to use APY and APR for your own crypto portfolios.
What you need to know about APY and APR
In the cryptocurrency world, the APY indicator holds a special place. This is because many platforms offer high APY rates, which can significantly increase your investment through compound interest, especially if the interest is calculated frequently (e.g. daily or weekly). In addition:
- APY will always be higher or equal to APR.
- APR gives you an idea of the basic interest rate you will receive.
- APY shows you the real return on investment, including compound interest.
APY is the key to success in cryptocurrencies
APY, as we mentioned earlier, takes into account compound interest. But what is it? Compound interest means that you earn interest not only on your initial investment, but also on the interest you have already earned. This can significantly increase your profits over a period of time.
There are two main ways to earn APY on cryptocurrencies:
- Deposits: You can place your cryptocurrency in a deposit account with an exchange or crypto wallet. Usually, deposit accounts offer a fixed APY that does not change over a certain period of time.
- Staking. Some cryptocurrencies allow you to “staking” your coins to help secure the network and validate transactions. You can be rewarded for this in the form of new coins. The APY for staking can vary depending on the cryptocurrency and the platform you use.
It is important to note that the APY in cryptocurrencies can be very volatile. This is due to the fact that cryptocurrency markets are very volatile, and cryptocurrency prices can change dramatically.
Here are some tips to help you choose the best APY for your cryptocurrency:
- compare APYs from different platforms;
- pay attention to the APY expiration date;
- Consider the risks associated with cryptocurrency markets;
- Do your research to ensure that the platform you are using is reliable.
APY can be a great way to earn passive income from your cryptocurrency. However, it is important to research thoroughly and choose a platform that suits your needs.
Factors affecting the APY and APR
The value of APY and APR is not stable and depends on the impact of many external and internal factors on the cryptocurrency world. Among them, the main ones are:
- The type of cryptocurrency. Different cryptocurrencies have different levels of risk and volatility, which can affect the APY and APR.
- Platform. Cryptocurrency exchanges and platforms often offer different APYs and APRs for the same cryptocurrency.
- Investment term. APY and APR vary depending on how long you invest your cryptocurrencies for.
Bottom line
APY is a more accurate measure of return on investment because it takes into account compound interest. APR can be useful for comparing base interest rates, but it does not give you a complete picture of how much you will actually earn. When making cryptocurrency investments, it is important to compare APY rather than APR. This will help you make a more informed decision on where to invest your funds.
Questions and answers about APY and APR
APY (Annual Percentage Yield) is a measure of interest income calculated with compound interest that an investor can earn in a year. In cryptocurrency investing, APY takes into account the possibility of reinvesting the interest earned, which can increase the total income.
The APR (Annual Percentage Rate) defines the annual rate of interest that investors pay or earn, excluding compound interest. In the context of cryptocurrencies, APR is used to demonstrate the simple interest that an investor can earn in a year without reinvesting earnings.
The main difference between APY and APR is how they calculate interest. APY takes into account the effect of compound interest, allowing earnings to grow faster through reinvestment, while APR shows simple interest that does not take into account the possibility of compound growth.
Understanding the difference between APY and APR helps investors assess the real return on investment, as these metrics affect the overall return. Investors can determine which product offers the best conditions for the growth of their assets based on their goals and investment strategy.
The APY in cryptocurrency projects can vary depending on market conditions, supply and demand for a particular cryptocurrency, as well as project management strategies. The change in APY affects the potential return of investors as it determines how much interest income can be earned on invested funds over time.
